Press Release

Actuaries point to signs of higher contributions going into defined contribution schemes as bigger firms switch from defined benefit schemes

31 May 2005: The first sign of higher contributions going into defined contribution schemes is reported following the latest published results of the Association of Consulting Actuaries’ (ACA) 2005 Pension Trends Survey.  The move from defined benefit schemes shows no slackening in its pace – 68% of such schemes are now closed to new members.  However, the ACA says that average contribution rates are rising due to higher contribution rates being paid by firms seeking to reduce defined benefit scheme deficits and by larger firms entering the defined contribution scheme market.

 

The ACA survey, completed by 392 firms with scheme assets exceeding £131 billion and with over 2.8 million members, found average combined employer and employee contributions into company sponsored defined contribution schemes is now 10% of earnings, an increase from 8.5% since 2002.  Whilst this is some encouraging news as the Pensions Commission wrestles with proposals to increase pension coverage and savings, the increase pales against the significant increases in contributions going into defined benefit schemes to fund benefits. 

 

Defined benefit contributions have increased from 15.8% in 2002 to 22% of earnings today.  Employer contributions have risen more than employee contributions since 2002 - employers up by 5% and employees by 1.2%, even though 44% of firms having increased employee contribution rates over the last few years.  Almost without exception, this increase in contributions is not funding benefit improvements but, rather, is going towards reducing scheme deficits.

 

The ACA survey found 89% of defined benefit schemes are in deficit, with an average ongoing funding level of 85%.  This suggests deficits across UK defined benefit schemes, on an ongoing basis, equate to over £130 billion across both large quoted and smaller firms (where the ACA found last year, funding levels were closer to 80%). 

 

To address this situation, aside from increases in regular contributions, 27% of firms have paid significant lump sums to reduce deficits.  However, 44% of firms expect it will take upwards of 11 years to remove their deficit, with the majority of schemes looking to either 10 or 15-year recovery periods.

 

The pace of change in the pensions sector must worry both the Government and the Pensions Commission as they deliberate – slowly – over future reforms.  The ACA survey shows 94% of firms will have reviewed their arrangements over a two-year period, with around a half currently under review or subject to review in the next 12 months.  This suggests firms are finding their own pension solutions at a somewhat quicker pace than Government’s response to the ‘pensions crisis’.  Given the actions already taken by firms, and with a more uncertain economic climate emerging, it may prove difficult to increase pension savings above current levels by either compulsory or voluntary means.

 

Commenting on the survey results, ACA Chairman, Adrian Waddingham, said:

 

"As we have highlighted in previous Pension Trends surveys and supported by the government's own Family Resources Survey, the number of employees covered by any form of occupational scheme is in quite rapid decline.  The policy-mix must be wrong for this to be happening and this view is shared by the vast majority of firms as evidenced by our first report in this 2005 series[1]."

 

“This latest survey report shows the immense efforts being made by many firms to meet the cost of pensions – costs that in many cases have increased far beyond what was expected when they set up their schemes.  In part this is down to increased longevity and weak investment returns, but added regulatory and government-led enforced benefit improvements have not helped at all. 

 

“That is why the ACA is calling on the new government to act to improve the Basic State Pension to a level that meets essential living costs, with private pensions built on top of this higher State pension.  Additionally, we want to see greater incentives offered to encourage firms to offer schemes of a good standard, including lower-cost defined benefit schemes offering a lower targeted benefit related, for example, to career average earnings. 

 

“What is concerning for the future, exposed by this latest survey, is that firms are more fearful of the impact of legislation on benefits and funding costs than anything else,” added Adrian Waddingham.

 

This second report of the ACA’s 2005 Pension Trends Survey is available at www.aca.org.uk on the ‘Policy Statements’ page.  The first report in the 2005 series and the ACA’s response to the Pensions Commission Report, which includes greater details of the ACA pensions strategy (pages 5 to 9) is also available on the same web page, see ‘Response to Pensions Commission - January 2005’.

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